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110. Is China in a Trade War with the USA?

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With a declaration by Mr. Trump of new tariffs
against USA imports and an immediate retaliation of new China tariffs against
imports from the USA, the start of a trade war has now begun. It is the purpose of this blog to track the
current status in economic warfare.1.Currency has gained about 9 per cent against the US dollar in a year.[http://www.scmp.com/news/china/economy/article/2139831/regulator-warns-chinese-not-gamble-yuan-exchange-rate] 04/01/2018

The stronger yuan comes as a trade war looms between the world’s two largest economies, with Trump demanding China cut its trade surplus with the US by US$100 billion a year and his administration planning to release details of punitive tariffs on up to US$60 billion worth of Chinese products.Wang Chunying, head of the international payments department at the State Administration of Foreign Exchange, warned after the yuan has gained about 9 per cent against the US dollar in the last 12 months. In contrast, the Dollar Index, which measures the value of the greenback against six major currencies including the euro and sterling, has remained weak since US President Donald Trump took office. The index has struggled at 90 since the middle of January after hitting a record high of 103.8 in January 2017.2.BEIJING MUST CHANGE ITS WAYS IN. TRADE WAR.[http://www.scmp.com/week-asia/opinion/article/2139708/beijing-must-change-its-ways-or-us-trade-war-looks-inevitable] 03/31/2018Last week, the Office of the US Trade Representative (USTR) announced US$60 billion of new tariffs on Chinese imports. By targeting China’s technology sector and areas such as AI, telecoms and autonomous vehicles – priority sectors in China’s “Made in China 2025” master plan – Washington is hitting Beijing where it hurts.The pursuit of foreign IP has been at the core of China’s strategy to become a global superpower. For decades, Chinese law has required foreign companies to form joint ventures with local Chinese firms, and, in the process, to transfer vital technology and know-how to their Chinese business partners.Estimating the monetary value of this is difficult, but, a recent report by The New York Times put US IP losses at about US$600 billion, per year, with China accounting for the majority of cases. Over the course of China’s meteoric economic rise, this adds up to trillions of dollars – by far the largest transfer of wealth in history. The uncomfortable truth for international firms, therefore, is that their long-term business prospects in China are tenuous. At any time, a joint-venture partner could walk away with their most prized IP or simply turn it over to government operatives.

President Donald Trump will learn that finding China’s pain points in terms of trade is more difficult than expected, as Beijing continues to focus on the domestic consumer economy and reduce reliance on the low-value-adding export processing industries.There was agreement that there is legitimate concern about China’s efforts to cull intellectual property, and about a minefield of local regulations that raise practical barriers for foreign companies wanting to do profitable business inside the increasingly important Chinese domestic consumer market (China’s GDP grew by more than US$770 billion last year – more than the dollar value of economic growth in Europe and the US combined).But there was also agreement that a tariff war targeting “old economy” exports like steel, shoes, toys or garments would do nothing to tackle these barriers. Wrong guns, pointed in the wrong direction. Back in 2005, when exports accounted for 35 per cent of China’s GDP, a tariff war might have concentrated Beijing’s mind. But today, with most growth being driven by the domestic consumer market, and exports down to 18 per cent of GDP, leverage has been lost.More than a decade ago, Beijing realized that much of its export processing economy, employing millions of mainly migrant workers, was actually immiserating China, not enriching it. An ADB Institute study of the iPhone provided shocking insight: for an iPhone costing (then) US$500 on a retail shelf in the US, the export value to China as iPhones left the Foxconn factory in Dongguan and passed Chinese customs bound for the US was just US$179. Worse, most of this US$179 was made up of components imported just weeks earlier from Japan, South Korea, Malaysia, and the US. The value being captured inside China – mostly an assembly fee – was US$7.

The US saying China is exporting goods worth US$179 (iPhones accounted for an estimated 8 per cent of China’s exports to the US), but China feeling benefit of just US$7 – shared between a Taiwanese company and migrant workers being paid poverty wages.Beijing has worked hard to bring more of the high-value-adding parts of value chains into China, and to build hi-tech industries in which it can establish a globally competitive position. China has successfully done this in areas like high-speed trains (CRRC), digital telecoms networks (Huawei), drones (DJI) and hi-tech batteries (BYD). Trump’s team is not wrong to be worried about China’s competitive emergence here, and to target these new-tech sectors in the latest trade war sortie.But China exports almost none of these new-tech products to the US, making US tariff threats meaningless. Rather, they go to developing economy markets – many embraced by the Belt and Road initiative – where China has succeeded in building a hi-tech, high-value brand reputation.Beijing may find US exporters easier to target without the danger of “collateral damage” on the region’s other exporters. Whether it is soya, beef, almonds or Boeing aircraft, a large majority of the value in such exports is captured by, and stays in, the US. Tariff pain would be acute and felt fast. With so much obvious likely pain at home, and such clear difficulties in achieving targeted objectives versus China, you have to come back to Trump’s preposterous claim that trade wars are good and easy to win, and ask a different question: How will Trump measure a win?

Summary:Trump is focused not on trade or even China, but on midterm elections, and keeping a Republican majority in Senate and Congress. As with his tax bill, Trump is delivering on a fundamental promise to his “core”. Little of the pain arising from a China trade war will be felt until 2019. Meanwhile, he has an election to win.